The Northeastern eight-state Regional Greenhouse Gas Initiative (RGGI) would have a positive impact on the region’s economy if states made increased investments in energy efficiency a centerpiece of their RGGI implementation efforts. This finding is the central conclusion of a report released today by the American Council for an Energy-Efficient Economy (ACEEE). RGGI is a multi-state effort to reduce carbon emissions from electricity generation through a cap-and-trade regulatory program.
The report, Energy Efficiency’s Role in a Carbon Cap-and-Trade System: Modeling Results from the Regional Greenhouse Gas Initiative, is based on extensive and collaborative analysis of the RGGI states’ electricity sector and the regional economy, for which ACEEE provided key input for the energy efficiency analysis. ACEEE worked closely with the state agency staff working group and modeling consultants in this effort. Based on the modeling analysis results, ACEEE finds that doubling the region’s current energy efficiency investment would:
1. Reduce growth in electricity consumption by two-thirds;
2. Keep electricity prices virtually flat;
3. Cut carbon allowance prices by one-third;
4. Increase economic growth in the region by almost 1% beyond the reference case; and
5. Reduce average energy bills for residential, commercial, and industrial customers by 5% -12% in 2021.
“Doubling energy efficiency investment could make RGGI a winner for energy consumers as well as for the environment,” said co-author Bill Prindle, ACEEE’s Deputy Director. “But that won’t happen unless the RGGI states invest a large share of emission allowances in energy efficiency programs and set electricity savings targets through utility policies in parallel to RGGI.”
The report points out that RGGI’s cap-and-trade system will not stimulate energy efficiency investment by itself, because efficiency at customer facilities is an “indirect” emission measure. The carbon cap is on emissions at the generation level, not on energy use, and generators can adjust operating patterns so that carbon emissions stay the same even if energy use falls. Because of this indirect-emission problem, energy efficiency at the customer level will not normally be saleable in emissions trading markets. This means that efficiency must be tapped through an explicit policy mechanism.
ACEEE recommends two complementary policies to double energy efficiency investment in the RGGI states:
1. Allocate a large share of emission allowances directly to entities that operate efficiency programs; and
2. Set energy savings targets for the utility sector.
The first approach taps a share of the dollar value of emissions allowances; designated efficiency provider entities would sell the allowances and use the proceeds for increasing efficiency investment through publicly funded programs. The second approach would be pursued in parallel to the RGGI regulations, setting savings targets reducing electricity demand growth to levels designed to keep RGGI’s costs to a minimum.
The RGGI draft Model Rule requires states to allocate at least 25% of carbon emission allowances to public purposes, especially energy efficiency. Some states, including Vermont, are moving to allocate 100% of allowances to such purposes. However, carbon prices in RGGI are expected to be low, and even 100% of allowances allocated to energy efficiency would not likely produce enough revenue to double efficiency investment.
To reach that goal, ACEEE recommends that states set resource standards for electricity savings as a percentage of total sales. As an example, the state of Connecticut in 2005 passed a law updating its Renewable Portfolio Standard, so that utilities will have to acquire at least 4% of their electricity resources from efficiency in 2010, ramped up in annual 1% increments starting in 2007. If all the RGGI states pursued this policy, it would more than double efficiency investment in the region. More information on how such utility energy savings targets can work is provided in an ACEEE February 2006 report: Energy Efficiency Resource Standards: Experience and Recommendations, which is available for free download at our website.
After more than two years of analysis, stakeholder consultation, and negotiation, seven states (ME, NH, VT, CT, NY, NJ, and DE) signed a Memorandum of Understanding in December 2005 to implement the RGGI program by 2009. Maryland joined by legislative action in April 2006, bringing the total to eight states. The program aims to reduce carbon emissions for the region by about 10% by 2019. A draft Model Rule was issued March 23, with comments due May 22 and a final rule expected in July. States will then develop their own individual implementing regulations and the first compliance period will begin in 2009.
Energy Efficiency’s Role in a Carbon Cap-and-Trade System: Modeling Results from the Regional Greenhouse Gas Initiative is available for free download at our website, or a hard copy can be purchased for $20 plus $5 postage and handling from ACEEE Publications, 1001 Connecticut Avenue, N.W., Suite 801, Washington, D.C. 20036-5525.
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